ContingencyContingency is a situation, the ultimate outcome of which, gain or loss, will be known or determined only on happening or non-happening of one or more uncertain future events.
Possibility of economic benefit that could arise from past events, which is not within the control of the enterprise, is known as contingent asset. The actual benefit arising will be confirmed only on the happening or non-happening of some uncertain future event\events.
- Disclosure: Contingent assets should not be disclosed in the financial statements but may be disclosed in the report of the Board of Directors. Contingent assets are not recognized in financial statements because this may result in the recognition of income that may never be realized and may not comply with law of conservatism.
Example: Expected gain from a legal proceeding.
Note: Contingent assets usually arise from unplanned or rather unexpected event\events that give rise to the possibility of an inflow of economic benefits to an enterprise. If the realization of an income is certain, then it is not a contingent asset and the same shall be recognized in the financial statements.